JUST ANOTHER DAY AT THE PENSION CASINO

The board that oversees San Diego County’s $9 billion pension fund is planning to get into banking, notwithstanding the financial chaos confronted by banks across the world since 2007.

Discussion was robust. Trustee Dan McAllister, the county’s elected treasurer, wondered, skeptically, how advisers could figure out how to safely lend money – up to $200 million per loan – to mid-sized companies that other lenders had already rejected as too risky.

It was a good question, the kind that answers itself. We have a better one: Why on earth would a pension fund for public employees even think about becoming a bank?

Answer: Because county supervisors increased pension benefits by 50 percent a decade ago, without nearly enough money set aside to fund the obligation. The fund is desperate for investment earnings, and taxpayers must foot the bill for any losses. It’s a recipe for risk-taking.

According to its latest annual report, the fund was already invested in banking, along with exotic investment vehicles ranging from Third-World debt to a smattering of derivatives that super-investor Warren Buffett once called “financial weapons of mass destruction.” This is not your typical retirement fund.

Nearly a third of the fund is invested in private equity and hedge funds. Both vehicles have historically earned and lost great sums, very suddenly, for their clients.

Even the best private equity and hedge funds can be difficult to understand and value properly. Managers typically don’t tell investors what they are doing until long after the fact. The board has experienced such shortcomings directly.

In 2006, a hedge fund collapsed after a natural-gas trader lost $3.2 billion in a week, taking $85 million in county pension savings with it. And the 2009 collapse of a second fund involving fraud has placed $78 million of pension money in legal limbo.

But this was a trifle compared to the fund’s overall $2.5 billion loss during fiscal 2008-09, which prompted the board to replace its in-house investment chief with Lee Partridge, a veteran bond trader who runs an outside consulting business.

It’s possible that Partridge has reduced the county’s risk profile. He has employed “risk parity,” a trend in which investors hope to cut risk and boost returns by investing in assets with values that historically move in opposite directions. For example, if stocks crash, the idea is that bonds or real estate might rise in value and offset the losses.

However, sometimes assets move together, particularly during financial panics. And Partridge, like other risk parity proponents, has relied heavily on leverage, a form of borrowing that can magnify losses very suddenly.

Even if risk parity proves in time to lower risk, like all investing strategies much depends on the skill and luck of the practitioner. The only certainty is that pension board members are risking taxpayer money, and not their own.